Unless some of the smartest people in the financial world are misreading their tea leaves, Australia’s new prime minister, Tony Abbott, has done more than win an election – he’s won the keys to a new era of solid economic growth.
Signs are emerging worldwide that the worst of the GFC is fading, bit as usual, Australia's fortunes will rest with China, the US and Japan.
Unless some of the smartest people in the financial world are misreading their tea leaves, Australia’s new prime minister, Tony Abbott, has done more than win an election – he’s won the keys to a new era of solid economic growth.
While domestic attention over the past few months has been focused on petty politics and pointless arguing over who’s got the smaller deficit, the world has been moving on, and up.
Multiple signals are emerging that the five-year long GFC has peaked and is finally starting to fade.
Aftershocks will continue to be felt because there is a mountain of debt to be managed and some regions of the world will take longer to settle, especially Europe, but for a commodity exporting country such as Australia the future is looking better today than it has for several years.
No-one is talking about a return of the boom years and another burst of hectic project construction. What’s emerging is the new normal of steady growth, which might not feel exciting but will be more rewarding in the long run.
There are three keys to this outbreak of optimism –China, the US and Japan.
China, as can be seen in the steady but not spectacular, growth in its manufacturing and services sector, will require more of what Australia’s good at supplying – raw materials from mines and farms.
The US, thanks to the combination of its monetary stimulus policies and discovery of a new energy source in shale gas, is growing at the fastest pace in five years.
Japan, after 20 years of stagnation, is also starting to expand and is back in the market for Australian commodities.
Three reports circulated last week latched onto this outbreak of optimism, which will underpin most sectors of Western Australia’s economy. Even the iron ore miners, who are heading into a period of lower prices, will not suffer greatly because the new normal will not be a crash, just lower and more sustainable prices.
The first document to catch the eye was an analysis of the global commodities sector by the investment bank Credit Suisse.
Rather than lament the death of the so-called super-cycle, Credit Suisse noted that: “Commodities have returned to the front of investors’ minds in recent weeks, demonstrating very well why, even within a structural bear market, the asset class should be a key part of any model portfolio.”
What the analysts at Credit Suisse particularly liked was the “modest rebound in Chinese growth”, prompting the production of a list headed “our five top trades”, which included greater exposure to copper, greater exposure to natural gas, reduced exposure to gold and reduced exposure to iron ore.
CIMB, a big Malaysian-based bank, chimed in a few days later with a commodities strategy report headed ‘Producers remain upbeat’, and while some sectors would do better than others, it said: “We are convinced that the global recovery is continuing with advanced economies taking up the slack from the larger emerging economies”.
HSBC, the bank with the greatest understanding of China thanks to its roots in Hong Kong and Shanghai, echoes the Credit Suisse view of the new normal being a period with less extreme cyclical movement but with ongoing strong demand and high commodity prices.
“Despite market jitters, commodity prices are still high, at broadly the same level as a year ago,” HSBC noted in its latest commodity research paper.
“While we expect modest declines in the coming years, commodity prices are likely to stay structurally high”, leading to a snappy observation that the future might be “more super, and less cycle” thanks to strong demand in emerging economies, which are still at their commodity intensive stage.
For WA, which is the most commodity focused Australian state, the outlook is for a shift to what might be called steady-state expansion – not too hot and not too cold – which some people might find boring after the boom but which will produce a far better outcome.
Across the ditch
IF there is a dark cloud on the horizon it remains the state’s high cost structure, which is being exacerbated by union activity of the sort hampering completion of the Gorgon LNG project.
Investors in other proposed projects, ranging from LNG to iron ore, are watching closely to see how the new Abbott government handles the union movement, which will be licking its wounds after its political wing lost power in Canberra.
While industrial action is a threat to WA’s future, and always has been, there is a new and more interesting threat emerging far to the east, especially for those companies heavily involved in the use of electronic data and internet transactions.
New Zealand, the country with an open invitation to join the Australian Commonwealth and the benefit of a free-trade agreement, is steaming ahead of Australia when it comes to productivity, competitiveness and costs.
Last week’s release of the World Economic Forum’s global competitiveness report found that, for the first time, New Zealand was ranked higher than Australia and that also for the first time Australia was not in the top 20.
The rankings were New Zealand 18th out of 144 countries (23rd last year); Australia 21st (20th last year).
In sporting terms New Zealand has just out-scored Australia, but in business terms there is something far more significant happening – if it is now cheaper and easier to do business in New Zealand, some Australian companies will be tempted to shift part of their operations across the Tasman.
If that sounds unlikely then readers of the Australian Financial Review newspaper should consider where their morning fix of business news is edited – New Zealand, because it is cheaper and easier.
You might not be able to shift a factory or a mine to New Zealand, but you can certainly shift the back office.
Hot costs
AS a final thought, there was a warning shot fired across Australia’s embryonic shale-gas exploration sector last week when analysts at Bank of America Merrill Lynch noted that drilling in the Cooper Basin of South Australia had encountered extremely high temperatures.
At around 260º Celsius, the Cooper gasfields are some 100º hotter than the Haynesville shale-gas fields of Texas.
And while not a game-stopper, the high temperatures will add to the cost of Cooper shale gas and serve as a warning to shale explorers elsewhere that replicating the US gas boom might not be as easy as some people imagine.
